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Transcript
John Stuart Mill – His main contribution to economics was his Principles of Political Economy. Political economy could distinguish the laws governing economic behaviour, enabling governments to create appropriate institutions. The institutions through which Mill sought to improve society were ones that gave individuals control over their own lives. He supported peasant proprietorship, giving small farmers the incentive to improve their own land and raise their incomes. He advocated producers’ cooperatives and industrial partnerships as institutions that would enable workers to share responsibility for the successful conduct of business. These schemes all had the characteristic that they maintained incentives. He described such schemes as socialist – the difference between socialism and communism, as he used the terms, being that socialism preserved incentives whereas communism destroyed them. Growth might slow down, but if workers turned to self-improvement there would be no cause for concern. Karl Marx – Marx’s analysis of the capitalism is as follows. Marx predicted that capitalist production would become more mechanized and more centralized. Because surplus value was produced by exploiting labor, rate of profit will fall eventually. Capitalist would attempt to counter this by increasing the exploitation of workers by increasing the work day and forcing workers to work harder. Marx argues that capitalists are forever striving to accumulate capital. Soon capital would accumulate so fast that they would not be able to sell all output they produce. The result would be that they will fail to see profits. Capital will be then liquidated as businesses fail. Then eventually the rate of profit would rise to the point where new investments were started and the system would move from depression into a new period of expansion. Therefore capitalism undergoes a cycle of periods of depression, medium activity, rapid expansion, and crisis. Marx see capitalism as containing the forces that would lead to its downfall. William Stanley Jevons – Jevons used utilitarianism to explain behavior. This involved assuming that individuals sought to maximize their utility – to increase pleasure and reduce pain as much as possible. He suggested 4 ways in which this might be accomplished: 1. allocating stocks of a good between two different uses in the best possible way 2. exchanging goods with other people 3. working to produce goods 4. through employing capitals For example, if an apple costs twice as much as a banana, the pleasure obtained from the last apple purchased must be twice as large as the pleasure of an additional banana. If it were less, the individual would give up an apple to get two extra bananas. With labor, the equivalent result is that a worker works the number of hours such that the pain of an additional hour’s work is exactly equal to the pleasure obtained from the additional commodities that that hour’s labor enables him or her to purchase. Leon Walras – Walras reaches same conclusions as Jevons did but by a different route and his focus was different as well. Walras believed that value depended on scarcity. He measured this scarcity in terms of what he called ‘rarete’, the intensity of the last want satisfied. While Jevons analyzed markets in terms of exchange between two individuals, which allows competition with other traders, Walras focused on an organized market in which everyone faced a market price. In this situation, an individual would decide how much of each commodity he or she wished to buy or sell. This led Walras to construct demand and supply curves, relating desired purchases or sales to price; as price rose, demand would typically fall and supply would typically rise. This market would be in equilibrium where the two were equal. Karl Menger - Menger’s main contributions: 1. An expression of the equimarginal principle (goods ordered by degree of importance)(show table) 2. His theory of value – he opposed the labor theory of value, (a diamond extracted with great effort from a deep mine is not worth more then one found casually on the ground) – he proposed ‘imputation’ (‘zurechnung’) as proper basis for valuation Zurechnung: this is based on Menger’s definition of a ‘good’: A good is defined by four characteristics; a) must fulfill human need b) must be capable of being brought into causal connection with the satisfaction of a need c) there must be recognition of this causal connection d) there must be control of the thing sufficient to direct it to the satisfaction of the need. Goods, so defined, are distinguished by order: ‘first order’ goods satisfy the human need directly. ‘higher order goods’ are complementary (yeast, for example) (Hebert) “it is the causal sequence, i.e. the notion that the value (and ‘goods’ character) of first order goods is transmitted or imputed to higher order goods, that typifies Austrian economics”. (Hebert) Friedrich von Wieser - Theory of value: antinomy (opposition) between value and utility – it is marginal revenue, not marginal utility, that determines value. Antinomy is not present under perfect competition, where total utility is equal to total revenue. But: a) when there is monopoly (then selected government interference is warranted) b) when purchasing power is unequal Natural value: marginal utility valuation – but: real world prices do not usually reflect the marginal utility valuations that would exist if the marginal utility of purchasing power were the same for all individual demanders. Implication for production: most products getting produced are the ones desired by the rich. Bread, which is favored by the poor, is available to the rich for a pittance (well below its value to them: the price is determined by the ‘weakest buyers’ valuation’) Vilfredo Pareto - In Pareto’s view, all economic equilibria are the result of a struggle between ‘tastes’ and ‘obstacles’ – in this context, other people constitute obstacles to the realization of one’s own desires (a mecantilist attitude: the zero-sum game) Pareto’s Law: Throughout history and across countries, the income distribution conforms to an invariant pattern (logarithmic [skewed] distribution); attempts to redistribute income by government policy will only set into motion forces that restore Pareto’s law. Pareto Optimum: optimum allocation of resources in an economy is not attained so long as it is possible to make at least one party to a trade better off without leaving the other party worse off. (use the ‘utility possibility frontier’ to demonstrate that move toward Pareto optimum from inside the curve may not always imply ‘Pareto improvement’ – this only happens if both parties to trade are better off as a result of move toward the surface of the curve (see Laidler)) Arthur Cecil Pigou - Stability: initially Pigou viewed business fluctuations as problems of ‘welfare’ economics – discussion of business cycles was a chapter in his Economics of Welfare book. By the late 1920’s, the chapter was expanded to a full length book. Other Contributions by Pigou: Government should avoid any tax on savings including property tax, death duties and progressive income taxes – this desire to increase national savings to promote economic growth rested on his (classical) –belief that economies tended towards full employment - he originated the idea that a decline in the general price level accompanying an economic downturn will increase the real value of peoples’ assets – so they will save less and spend more – this became known as the “Pigou effect” (or ‘real-balance effect’) Unlike his rival, Keynes, who advocated government intervention to restore prosperity, Pigou felt that the real balance effect would achieve the same. Jules Dupuit - Other Contributions by Dupuit: (after E&H) - reconnection of the demand curve to the concept of utility – pioneered concept of diminishing marginal utility as basis for demand curve. Area under demand curve thus measures ‘total utility’ and can be divided into three parts of varying size: Consumer’s surplus, producer’s surplus, and ‘deadweight loss’ (utilité perdue). Discovered that monopoly profit maximization requires price to fall (rise) when costs fall (rise) Proposed rule that government should provide public good if marginal annual receipts [of an enterprise] can cover the marginal costs including amortized investment. Discusses effects of monopoly price discrimination. This is important in the economics of transportation systems, as these are typically ‘natural’ monopolies experiencing high fixed costs. If railroad is run by private monopoly, public is likely to get less service. Government, by contrast may opt to maximize consumer’s surplus. Also: By setting discriminatory tariffs, it is possible to increase total utility, and Dupuit was of the opinion that “discrimination was desirable only if it increased quantity over that obtained under a single-price, simple monopoly system, for only in that event would [deadweight loss] be reduced”. (Ekelund & Hebert p. 278) Another insight of Dupuit concerns the effect of varying tax rates on the government’s tax revenues. (Britannica) Thorstein Veblen - A brief synopsis of Veblenian dynamics: a. as civilization evolves, passive acquisition of wealth becomes more important than acquisition by plunder – need to demonstrate wealth by conspicuous consumption – this gives rise to emulation b. c. parallel to this, ‘irksomeness of labor’ – need to work signifies lack of success but ‘idle curiosity’ inspires technological innovation which drives the ‘machine process’ and creates the ‘instinct of workmanship’ d. eventually, the instinct of workmanship overcomes the irksomeness of labor – and this moves the economy forward John Rogers Commons - Firstly, institution is defined as ‘collective action in control, liberation [of individual action from coercion, duress, discrimination, and unfair competition by other individual] and expansion [collective action helps to expand individual action beyond individual’s puny acts (p.650)] of individual action.’ This takes the form of either ‘unorganized custom’ or ‘organized going concerns’. Individual action consists in particular of the triads:: a. bargaining transactions (persuasions or coercions) b. managerial transactions (commands and obedience – superior is individual) c. rationing transactions (arguments and pleadings – superior is collective(say government)) These 3 types of transactions determine legal control, which represents future physical control In a transaction, each participant is ‘endeavoring to influence the other’ towards: a. b. c. performance (actual performance) forbearance (limit placed on performance) avoidance (alternative performance rejected) – all at one and the same point of time. three social relations are implicit in every transaction: a. conflict (on account of scarcity, which creates conflict, not harmony as in Smith) b. dependence (reciprocal alienation and acquisition) c. order (‘a workable mutuality and orderly expectation of property and liberty’ – not a foreordained harmony of interests or a mechanical equilibrium) Wesley Clair Mitchell - Distinction by his teacher Veblen between making money and making goods led Mitchell to lifelong study of business cycles. Money is not merely a medium of exchange – rich or poor does not depend on making goods but on ability to make money – ‘real’ goods will only be used if men in command of production expect a monetary profit from their use, (Spiegel, quoting “Business Cycles” (1913)) – Mitchell thus studied the “relationship between two groups of time series, one group measuring physical quantities of goods, the other sums of noney” John Bates Clark - aggressive competition would result in monopoly - proposes cooperative ventures and profit sharing as solution; this would produce ‘just’ outcome. – in his later books, he downplayed this approach, suggesting instead that ‘latent’ (potential) competition will temper monopolists inclination to raise prices, and that growth of capital would lead to new competition (Backhouse p.190) Clark’s theory of income distribution has had lasting impact, as it counters socialist claims of capitalist exploitation of labor. This theory asserts that “each factor of production (land, labor, capital) received a reward equal to the marginal value of its contribution to output” Irving Fisher – mathematician switched to economics Remembered mainly for ‘Fisher effect’ which has crucial implications for monetary theory – according to it, nominal interest rate incorporates premium for expected inflation in addition to ‘real’ interest, which was determined by the time preference of people and the productivity of capital – so when money supply is increased, interest rates may actually rise rather than fall, because the increase in money may engender inflationary expectations.